6Bubbles - Grad School, Money, Life

SJ seeks “The Economic Naturalist”

It’s Summer BREAK!!! AND I’m not doing an internship this summer! And I’m still not taking summer school! Woohoo! This is awesome.

Except I’ll be at school spending most of my time doing research =)! Meaning I’ll be spending 30+ hours/day 10 days/week working on research. Or not.

But regardless, I made a short list of other goals for the summer. One of these is to read. Both “trashy” fiction, as a friend put it, and non-fiction self-development, i.e. edumcating books. One book I recently read was The Economic Naturalist, as suggested by the Weakonomist. Thanks for the suggestion, twas a fun book =D!

What is this book about? It’s an attempt to teach economic principles, but instead of messy math and principles and axioms, it’s taught with economic topics and questions. Each of the questions are about the most random topics, but all have solutions implied from basic economic principles.

It’s been a long time since I last took any economics course (Intro to Econ… Freshie year… four years ago!) and this was a great refresher. So what are some of my favorite topics broached?

• “NO cash on the table” — Because of supply and demand settling on optimal pricing, there are rarely opportunities to make a quick buck, via “clever” routes. Furthermore, as an implied corollary there is “no free lunch”.
  Why are peanuts free at bars? Are bartenders nice and helpful and wanting to feed you? Nah… the peanuts will make you thirst for more beer.
• Discount Pricing!! — Now being poor grad students we all love a cheap deal. How do companies afford to offer such great deals to some people.. but such expensive prices to other? By placing additional non-monetary costs, hurdles, to the product, you can price ($-wise) them lower.
  Consider rebates, movie matinees, happy hours, financial aid in college
• Arms Races — The ugly side of competition. When people are in direct competition, the only thing that matters is relative ability. However, in an attempt to achieve better results they increase their absolute abilities. As everyone is forced to “keep up”, a a disastrous and expensive arms race occurs.
  Just look at politicians, mutual funds, animals, and almost everything.

This is probably one of my favorite points of the book. Arms Races are a breakdown on Adam Smith’s “Invisible Hand“. In the Invisible Hand metaphor everyone selfishly chases their own needs and desires. In the process society supposedly benefits.

However, when an Arms Race occurs there is actually a divergence between individual and social interests. That is, what is good for the individual is not good for society. The book uses an example from nature.

Male deer use their massive antlers to joust one another for dominance. The ones that win are able to partake of the female deer and pass their genes along. Because large antlers give you an advantage, natural selection has caused males with larger antlers to be preferred. However, eventually they get extremely huge, unwieldy, and more dangerous.

Now recall that the deer are using these antlers in direct competition with one another. If it were possible for everyone to half the size of their antlers, the same results would occur but antlers would be smaller and easier to wield. Instead evolution pushes the antlers to massive sizes until outside forces, such as hunters, kill the elegant and extravagant ones.

Of course, we, being humans and wise would never do anything that stupid right?

Arms races bear a strikingly similarity to the “Prisoner’s Dilemma“. The Prisoner Dilemma is setup so the “optimal” decision for yourself is to “screw your neighbor”. Regardless of what he decides to do, “screwing your neighbor” gives you a better result. However, the best societal result is when both parties decide to work together. This argument is used a lot for forcing people to make unappealing decisions.

But of course we’re all smart and would never let it happen to us right? I’ll let you ponder that question… Consider anything with curves; be it elections, sports, or modeling. People spend more money and maneuvering in elections, certain athletes get paid insanely high, models keep getting thinner and thinner and scarier.

Of course after a point it gets too ridiculous and government intervention occurs. Mandates capping campaign spending, athlete pay, and making women eat.

Fun right? So let me leave you with my favorite quote:

“In the kingdom of the blind, the one-eyed man is king.”

So strive to be a Cyclops! Educate yourself, even if not thorough, to the best you can.

Back from the Dead…

Kind of.

Hey guys~~~ as you may have noticed (or not) I’ve been pretty lazy with posts recently. Mostly it’s because I’ve had my finals and projects to finish up. That and enjoying life with travel back to IL and San Diego ^_^!!

But now I’m back at school and “working hard” on my research and what not… so hopefully will have lots of time to devote towards slacking off and posting.

In other news, please  take a quick look at the Monty Hall Problem (yes getting too much press probably…) and advise if these somewhat nerdy topics are entertaining! 

Also, I’m not sure where JC went. Lazy Bum.

Monty Hall Problem

This problem is pretty entertaining. It’s too popular; showing people misconceptions about probability and their common sense. It’s been covered in pop culture such as 21, my stats class, and some blogs. Recently, The Oblivious Investor wrote up a nice post on common sense and the Monty Hall problem.

I just wanted to expand a bit more on the problem. In case you are wondering, it has nothing to do with investing, just with probability and math. (Yes I’m sort of a nerd…) So the problem?

Suppose you’re on a game show and you’re given the choice of three doors. Behind one door is a car; behind the others, goats.

The rules of the game show are as follows: After you have chosen a door,the door remains closed. The game show host, who knows what is behind the doors, now opens one of the two remaining doors, and the door he opens must have a goat behind it. If both remaining doors have goats behind them, the host chooses one randomly.

After the host opens a door with a goat, he will ask you to decide whether you want to stay with your first choice or to switch to the last remaining door. Imagine that you chose Door 1 and the host opens Door 3, which has a goat. He then asks you “Do you want to switch to Door Number 2?” Is it to your advantage to change your choice?

As Mike mentioned, by changing your door the probability of winning goes from 1/3 to 2/3. How in the world does this work? The car has to be equally likely to behind a door right? There are only two options now… right?

There are a bunch of ways to think about this. But the most intuitive (for me) is the following…

1. Initially, assuming no x-ray vision, you are 33% certain you chose the right door, i.e. Door 1
2. That means you are 67% certain you chose the wrong door
3. That means between the other doors, Door 2 and Door 3, there is a 67% chance that one of them holds a Car!
4. The host, knowing where the Car is, shows one of Door 2 or Door 3 has a Goat, in this case Door 3.
5. The combined probability for Door 2 and Door 3 having the Car CANNOT change. Thus, the remaining door, Door 2, has a 67% chance of having a Car and 33% chance of having a Goat!
6. So obviously, even though I would be interested in a Goat, I should switch doors and hope for a Car.

Another intuitive way to think about it is by drawing out charts and graphs. If you think the door you chose contains a Goat and then the host shows you another door with a Goat, then you should think that the remaining door has a Car.

And then there are the messy ways of analyzing conditional probabilities (Go Bayes~~!!). Go to Wiki if you are curious; I will say that while that is a good exercise, provides very little intuition.

So that was fun, now how about a different problem?

You are again on the show. You choose Door 1. The host admits that he doesn’t know where the Car is either, but shows you Door 3 which contains a Goat. Assuming you trust the host’s claim, what should you do? What is your best probability of winning a Car?

(Hint: I wouldn’t ask the problem if the result wasn’t different)

So what is the solution? Should you switch and expect to double your chances of winning! Or was I just trying to trick you with this problem? For this problem it doesn’t matter!!! Assuming the host wasn’t lying then your odds of victory are still 50%. Now, I’m sure half of you all are confused so let me repeat this:

The probability that either door contains a Car or Goat is 50%.

Why is this different to the above case?

1. If you re-read this new problem carefully, you’ll notice that the host does not know where the Car is. That means there was a finite probability the host would have revealed where the Car was when he opened a door. 
2. However, since he revealed a Goat at random, he actually provided us with more information than in the earlier problem.
3. That is, he revealed a Goat it increases the probability that your initial door contained a Car. In fact, it increased the probability from 1/3 to 1/2. 
4. In case this is unclear, just consider the reverse. If the host had accidentally revealed a Car, then he revealed information about your initial door. That is, the likelihood your door contains a Car goes from 1/3 to 0!
5. Finally, for this problem, since there is a probability that the host reveals the Car, the likelihood of winning in this game, provided you are allowed to choose the revealed Car, is also 2/3rds! This discovery was really cool to me.

What is the lesson here?

• Apparently even random information IS information
• Cars are usually better than Goats
• Minor changes to a problem can alter it
• Look and find the intuition… Intuitive explanations beat out math… BUT be careful of subtleties 
• Consider simplifications and transformations to the problem…
  • Consider how I reverse the initial 1/3 probability of Door 1 having the Car in problem 1
  • Consider how I asked what happens if the Car were revealed in problem 2
• Finally… SJ is just kind of nerdy…

To beat A Goliath, Think like David

On facebook one of my friends decided to share this article revealing the battle between David and Goliath! It’s a fun read, so I encourage you all to give it a skim.

It discusses the “battles” between “David’s” and “Goliath’s”. For those who may have forgotten, the original story is how the young man David took down the strong giant Goliath and using that momentum was able to defeat the Philistines.

These days that statement refers to the underdog conquering the giant, the legend, the elite. Despite odds against you, you conceive the ultimate strategy and tactic and win!

I think this article is great. It fits in well with my earlier posts on Your Role and Planning. Why would you ever fight your opponent in their area of expertise? Take full advantage of the rules and try to convert the confrontation towards your area of advantage.

Within it, it discusses how the political scientist Ivan Arreguín-Toft looked at every war fought for the past 200 years between lopsided parties, with one group have 10x the military might. Shockingly the stronger side, Goliath, only won 70% of the time! How in the world could a much weaker party squeeze out such a large victory percentage? Let’s condition on events now =)!

When David fought by transforming the fight and forcing Goliath out of their comfort zone they more than doubled their win percentage to a whooping 63.6%! The underdogs win MORE! Awesome!

The lesson:

David can beat Goliath by substituting effort for ability—and substituting effort for ability turns out to be a winning formula for underdogs in all walks of life…

I think this does summarize it well, but there are a few things it misses.

First, one idea it helps bring up is generating short-term advantages. By bring more effort into play you are in a sense risking long-term chances. Could a team run a full-court press for 100 minutes? I doubt it but it doesn’t matter! You’ll have won or lost before then.

Second, you are bring in MORE pride and desire to the “game”. In that sense it’s contradicting the above; increasing pride you are hoping for improving long-term chances. Will we get bored and give up on killing bugs? They won’t fight us head to head and keep running away =/

Third, a more mathematical (cues grin) way to think about it is that you are transforming a game; lowering expected value but raising standard deviation.

Considering the following strategies:

1. EV = -5, SD = 0
2. EV = -10, SD = 20

For games like basketball your score at the end doesn’t matter. Losing by 5, 10, 100 points, albeit embarrassing, are all the same. In that case your best option is to take a slightly “risker” strategy which is also your only option for victory =)

The full lesson is don’t be a lemming or a cow. Don’t implement the “normal” strategy just because everyone else is; if your skills and strengths are ill-suited for it. Try something different. And if all else fails, fall back to sheer force of will =)

“Credit Card Holders Bill of Rights”

WTF.

There’s been lots and lots and lots of commentary on this proposed bill of rights so I figured I’d jump onto the bandwagon.

So what is it?

• No more Universal Defaults — If your credit worthiness has decreased… provided you are given advance notice…
• Limits how often/timing of rate hikes and imposes more warning before rate hikes can occur — Semi-reasonable, tho I will say they are on the extreme-side. 
• Increased number of days from receiving statement and due date — Essentially increasing the grace period, in this day and age with technology does it matter? Pay online =)
• Payment due on close of business — Disagrees, send it in earlier! Plan ahead! I voted by mail this past week, it’s not JUST the postmark date. (Or heck, just do it online =P ) Government does it for one of the fundamental rights of our country, why should paying someone back be different
• No more Double Cycle Billing — Sounds kind of unfair but I’d have to look at how other loans work to past judgment =)
• Fair Allocation of Payment — Sounds reasonable. How about we just let people choose? I mean, if you were following Debt Snowballing then you’d want to eliminate the smaller debt first right =)?
• Permission to exceed limit — People who exceed the limit will probably want to be able to … fearing the embarrassment more =)
• More difficult for students to get a credit card — Yay! But… why 21? why not 18? Or 25? Or make it more difficult for all people; show me your incomeSSS

So I wasn’t completely negative about the bill =)! What does make me mad?

Me potentially getting jibbed! I like getting subsidized by those less responsible! My bet? Average APR goes up (no balance for me still!), increase in reward dilution… and that’s all. Or at least all I hope I see! If the grace period disappears (Which I think has 0% chance of occurring) than I’ll have to use a debit card =/

What does gun control and credit cards have in common? They are on the same bill. I understand, our political system is terribly (in)efficient, passing few large bills containing multiple unrelated things (see also: stimulus package) but this is just weird. OH WAIT. Both guns and credit cards are terrible in the hands of those irresponsible. I got it now, so this bill wants to… help people handle powerful dangerous tools? 

The resulting debates: A bunch of these views are stupid. There I said it. STUPID. 

• Dave Ramsey — Anti-credit; Not for me but I can understand it.
• Don’t Blame the ‘Revolvers’ — People who carry a balance but pay it off are responsible… NO. I will make the assumption if you read this blog you know why =)
  This post actually made me the most mad…
• Limited and More Expensive — Wow we should be excited to qualify for a low low credit rate of 10%? NO.
• What the Legislation Really Means — Okay I like this analogy, forcing banks to assess risk early on. However, it’s a freaking open line of credit; won’t this necessitate tightening rates? Furthermore many households do NOT assess expenses a priori =)
• Expect Consumer Resistance — This would be nice, people getting more intelligent and recognizing excessive spending.
• Privilege or Entitlement? — Good history lesson. Also, interest is a tax on over-consumption… great way to put it!
• Someone Has to Pay the Piper — More fun background about transaction costs (another subject I have a big gripe with) Go read it! (even tho to be honest it doesn’t discuss the issue)
• We Need Fair, Understandable Pricing — “Many Americans no longer trust their financial future because too many are struggling to stay afloat amid too much overpriced and ultimately unaffordable debt.” I wonder how they got into the debt in the first place…
• Different Users, Different Revenue Streams — This is also interesting… how will the structure change?

(Actually I’m not sure why I included this paragraph, looks soooo fluffy; I think more that I read through the debate and parts just made me mad lol; sorry guys)

Finally, why is this bill referred to as ”Credit Card Holders Bill of Rights“??? Do we REALLY want to draw parallels between this and the Bill of Rights the Founding Fathers made? Is No Universal Default on the same level of importance as Freedom of Speech? This probably makes me the most mad and annoyed. 

** Ends Rant **

Also, we didn’t die. JC and I both finished school and have been on finals/vacation/slackers… For our few readers; we are back =)

Cheers!